‘The new norm’: Austin coping with influx of multifamily properties

Austin’s multifamily market is dealing with an oversupply of available units
— a “too much of a good thing” scenario. National and local apartment data collector ALN Apartment Data indicated that this trend is likely to persist through at least 2024. Its data ranks Austin eighth in the country for cities with the most new units under construction. As of September, it recorded 63,882 units under preconstruction, 41,071 units under construction and 10,124 units under lease-up or being filled. Add to that another 17,364 units under construction/lease-up, and Austin’s apartment cup runneth over.

“The Austin multifamily sector is currently grappling with an oversupply of units, largely driven by significant new construction in recent years,” said Cheryl Higley, managing director of debt & equity for Northmarq’s Austin office, which offers comprehensive services in debt, equity, investment sales and loan servicing. “This oversupply has led to vacancy rates reaching a 20 year high. However, there are indications that the market will gradually balance out in the long run.”

One key factor influencing this balance is the projected growth in the population of young adults aged 20-34 in Austin. With a forecasted increase of 1.8 percent in 2024, Austin leads major U.S. markets in the growth rate of this demographic. “Given that this age group is more inclined towards renting rather than homeownership, the continued influx of young adults into the city, in addition to the expected drop-off in new units, suggests a more balanced multifamily market in the long run,” Higley noted. A seasoned professional with more than 22 years of experience in multifamily asset financing, Higley emphasized the importance of location in driving investment decisions amidst the current market scenario. “A couple years ago, multifamily properties in Austin were trading at similar cap rates, regardless of quality and location,” she said. “We currently have a multifamily listing in North Austin that would have traded at a 3 cap a couple of years ago, but now it’s approaching a 7 cap. This significant shift in cap rates underscores the impact of market dynamics on investment strategies.”

Multifamily owners are strategizing in response to market conditions, with some focusing on new acquisitions while others reinvest in existing properties. Age of the asset plays a significant role in decision-making, with buyers showing interest in older properties in strategic locations. “Owners are taking a more strategic view as their loans are maturing, evaluating between a refinance or sell scenario. We are seeing more owners adopt a ‘wait-and-see’ approach until market conditions become more favorable,” observed Higley, who, along with a team of Northmarq professionals, delivers tailored solutions to clients’ needs, attracting diverse capital sources while providing personalized services for buying and selling
multifamily properties.
Regarding the economic outlook, Higley remains cautious. “We need to be prepared for a higher-for-even-longer reality and a dim path for interest rate markets in the near future,” she said. “It is unlikely that interest rates will return to the historically low levels experienced over the past decade, but the market will eventually accept the new norm and pick up transactional activity.” While the Austin multifamily market currently faces challenges due to oversupply and shifting dynamics, there are signs of resilience and opportunities for growth. With a strategic approach to investment and a focus on emerging market trends, stakeholders can position themselves for success in the long term.